The False Claims Act After Scalia

A case critical to the meaning of the submission of false claims under U.S. False Claims Act is scheduled to be heard in March by the U.S. Supreme Court. And now the outcome of Universal Health Services, Inc. v. United States ex rel. Escobar will almost certainly be different because of Justice Antonin Scalia's death this week.

Justice Scalia's take on the False Claims Act was less predictable than his stances in other areas. He was deeply skeptical of plaintiffs' power to pursue cases, worrying in open court about the burden of discovery on defendants. In AT&T v. Concepcion, he gave arbitration clauses priority over class action, a crippling blow to many consumer fraud cases.

GBut as a small government conservative, Justice Scalia showed an appreciation for the False Claim Act's creation of a nation of private prosecutors ferreting out fraud in order to share in the proceeds. In Vermont Agency of Natural Resources v. U.S. ex rel. Stevens, Justice Scalia delved back into 13th century English law, and explored colonial American law for the sources of this qui tam power.

But in that same case, he carved state agencies out from liability under the False Claims Act, holding that state entities cannot be considered "persons." That position shrank the scope of the False Claims Act in many ways. For example, just last month, the First Circuit ruled that the University of Massachusetts Medical School was immune from any liability for government fraud under the False Claims Act, because it could not be considered a "person" as a state entity.

In Rockwell Int'l v. United States, Justice Scalia conducted a tour de force of the kind of fine-honed textual analysis that made him a Justice for the ages. Demonstrating a keen understanding of the purpose underlying the False Claims Act and its practical application, Justice Scalia straightened out an ambiguity in the public disclosure exception to that law.

So it is somewhat difficult to predict exactly where Justice Scalia would have landed in the Escobar case now pending before the Supreme Court. Escobar is intended to settle a thorny question of interpretation in the False Claims Act. Namely, if the United States government says that it will only pay for something if a certain condition is met, what happens if a company assures the government that this condition has been met, when, in fact, it hasn't? Is that a false claim?

It is a question that has divided the circuits. In Mikes v. Strauss, the Second Circuit adopted a theory called implied certification, which held that if the government states that it will only pay if the condition has been met, then it is fraud to say that the condition has been met in order to get paid. The Sixth Circuit adopted the same theory, and it was expanded in the First, Fourth and DC circuits.

The Seventh and Ninth Circuits have a different approach. They view the issue basically as a matter of contract interpretation - is the condition material to the contract? If it is, then it is fraud to state that the condition has been met. In a case that we recently argued before the Seventh CIrcuit, U.S. ex rel. Grenadyor v. Ukrainian Village Pharmacy, Inc., we invited the Seventh Circuit to adopt the majority approach of implied certification. During oral argument, Judge Richard Posner asked me what the difference was in outcome between the approaches, and I was hard-pressed to come up with gaping differences. Judge Posner said he could not think of much difference, either, and his opinion reflected that. As a result, the Seventh Circuit sticks with its approach.

In statute interpretation, Justice Scalia's analysis often resembled Judge Posner's. So if Justice Scalia were still alive, chances are, his opinion would allow the circuits to maintain their varying approaches. Justice Alito, who has been historically hostile to the False Claims Act, would take a more restrictive approach, as would the more corporate-friendly justices, Roberts, Thomas and possibly Breyer. That would leave Justices Kagan, Sotomayor, Ginsberg supporting the more expansive interpretation, with Justice Kennedy as a swing vote. In that case, Justice Scalia's opinion would have tipped the balance, likely in favor of maintaining the status quo.